Making financial products True and Fair
Delivering a fair deal for savers and pensioners is something the TUC has long championed and it is also a topic I am determined to focus a spotlight on. I feel particularly passionate because I believe pensioners and savers in the UK are being failed, dare I say those who are acting prudently are being exploited, by many in the sector that I work in, the fund management industry.
While some pension and investment fund managers have delivered excellent growth, for others the profit generated for customers is being significantly eroded by fund fees and charges. Many of these costs are ‘hidden’ and not disclosed to savers, or are so confusing that even those in the industry find it hard to quantify what they are.
Our analysis shows that savers and investors in the UK are paying around £18.5 billion a year in hidden costs and fees. This is completely unacceptable and significantly reduces the opportunity for the majority seeking to build a nest-egg for themselves and their families.
Don’t get me wrong, I’m not against fund managers charging a fair fee for the service they deliver but it is critical that they disclose, in full the total cost, so that savers can compare the amount they pay for a pensions or investment fund, with the returns they are likely to receive.
Savers then have the option to decide whether they think the price they are paying represents fair value. In many cases the fees and charges paid deliver a healthy pot for the fund manager and others on the investment chain but an unhealthy pot for savers and investors.
If a pension or investment is growing by 5% a year, you assume inflation is running at 2.5% per year, and costs and fees are another 2% of top of this; there wouldn’t be a lot of return left in an investor’s pocket.
In real terms this would mean that the 5% growth you think you’re getting for your pension or savings is actually just 0.5% after charges and inflation are factored in – and in many cases the real return can be reduced to zero, or worse.
Eighteen months ago we launched The True and Fair Campaign with the aim of ending the shoddy practice of hidden costs, and called for the fund management industry to act in the interests of consumers by publishing, in full, 100% of their fees, in one number. Research we conducted in January 2013 found that 92% of people wanted these costs in one number.
Our call was initially met with ridicule and derision, and with bankrupt intellectual arguments. We persevered, and the fund management industry, the Investment Management Association and the Financial Conduct Authority have now acknowledged that hidden fees and charges are an issue that needs to be addressed.
This is welcome but it does not equate to action.
Pensioners and savers still have no idea what they pay in fees and charges for their investments. In no other industry would it be acceptable to hide the cost of purchasing, or the ticket price, from consumers.
To address this and ensure there is a practical solution that gives consumers transparency sooner rather than later, we at The True and Fair Campaign have spent the last five months developing a free-online clarity tool that launched on the 22nd May, The True and Fair Calculator – www.trueandfaircalculator.com
This tool allows savers for the first time to see what they are really paying for investments and how these costs can impact the likely returns back in their pockets. The costs and returns are presented in one figure, in pounds and pence, and as a percentage. The Investment Management Association has recently been saying that they now support initiatives designed to ‘help investors better understand fund charges and costs’; a very welcomed step forward from their earlier claim that hidden charges were a ‘myth’. The True and Fair Calculator is unique as it also shows the relationship between cost, risk and returns; as well as allowing users to compare completely different investment or savings options side by side.
We very much hope that savers, company pension administrators, consultants, trustees and the financial advice industry will use this Calculator to gain a better idea of the costs of investing in pension and investment funds and make their own judgement about whether these are justified by the performance.
For those pension and investment funds that deliver value, the True and Fair Calculator is presumably something they will welcome. Driving transparency is after all something that their customers want. For those with less than impressive performance which is being eroded by high fees, then the calculator ensures there is nowhere left to hide and will protect consumers by empowering them with more knowledge.
Continuing to withhold details on the costs and fees paid by savers is utterly unacceptable and does nothing to re-build trust in financial services. It will not help us plug the pension and saving gap that exists in the UK.
If people need to save more for their future, then they need confidence in the financial services industry that they entrust to manage and build their money. We hope the True and Fair Calculator advances this cause and starts a consumer movement for change and value.